SAAS (Software As A Service), solutions are so ingrained into our normal day that their existence and reach in our corporate and individual lives are often taken for granted. With the evolution of SAAS business models that permeate industries and workflows, it's good for us to understand more about the basics of setting up SAAS company finances.
Most small companies, whether in SAAS or not are familiar with Xero and how they've become the go to software for small company finances. It's a great tool for book-keeping and a level of financial analysis. Here are 6 of our recommended tips when using Xero for your SAAS company finances.
Tip 1 - Modify Chart of Accounts to reflect your revenue and overheads
Xero has it's own in-built Chart of Accounts that you can use as a starting point. It has a great set of everyday account heads you'd generally need for any type of company. For most SAAS companies however small, would have some specific accounts that's unique to them. An easy example is "Cost of Sales"; while the general Chart of Accounts (COA for short); might refer to a cost of sales as a direct cost item, you can customise it to call is something more specific to your product such as Cost of subscriptions sold
Similarly you can create line items in your COA for specific product sales. Such as
Revenue - Product 1 / Revenue - Product 2.
Doing this at the start can save you a lot of time as this flows onto layouts and reporting whether from Xero or from other apps you'd choose to connect to Xero.
Tip 2 - Customise your Xero Dashboard
Your Xero landing page is your Dashboard. You can customise it to show what you need to have your eyes on rather than crowd it with the things that are not really critical.
We suggest having the bank accounts show there and using the account watchlist section to show balances on accounts you'd like to have an eye on. An example is to add the Directors Loan Or sales accounts to the Accounts watchlist for an easy view
Tip 3 - Set up product inventory
Even though inventory is associated with physical goods in the literal sense of the word, Xero's inventory feature is something we use a lot to make SAAS company invoicing faster. This allows for items of sales that are consistently invoices across clients to be codified for easy access. For e.g.. if you have license fees that goes month to month across clients, you can set up a product inventory with base cost showing as your lowest point of sale. If there is a tiered billing structure, you can add different inventory items to reflect these.
For monthly invoicing, we've found this to be a game changer. There are other methods you can use for repeat invoicing processes that also allows for faster invoicing process.
Tip 4 - Optimise tracking categories
This is easily one of Xero's ace features which we've adapted and use across clients extensively. Xero allows for 2 broad tracking categories. While this is not often enough for clients, we combine that with some clever COA hacks (see tip 1) to deliver product wise insights for clients. The tracking categories are most useful for companies that need segment profit and loss accounts. You can track profitability across products based on how you demarcate them. SAAS companies use them
~ to demarcate geographical performance
~ differentiate recurring vs non-recurring revenue. This is a key consideration for SAAS and can make it easier to track MRR and ARR
~ Drill down by department if there are different segments within a company. One of our clients have assigned 4 pillars (4 product lines) and we track revenue and expenses across these pillars. Each pillar has a Head of Product who then analyses this for greater clarity on profitability
You can also create segment wise budgets in Xero to create a truly comparable profit and loss; highly used in variance analyses. However, the one disadvantage here is that if you create pillar budgets on Xero, it doesn't automatically add up to a master budget.
Tip 5 - Change layouts to suit management requirements
Xero has in-built capabilities to customise financial reports and change the layouts to suit management requirements. It's common for our SAAS clients to want to see a cascading Profit and Loss as an example that shows each different revenue source against it's own costs of selling that product. This requires some work arounds too and takes time to bring it to a shape and form that's most useful for clients. However changing your reporting layouts and clubbing account heads together is a great starting point.
Tip 6 - Configure payment gateways the right way
Most SAAS companies have a few payment gateways integrated on their website. Stripe is one of the most commonly used gateways in the UK. The likes of Stripe and Paypal integrate to Xero but at Evalua8 we carefully ascertain whether a direct integration would be actually useful. The problem we've noticed is that gateways such as these connect directly to the client's bank account which is already set up on Xero. The transactions on Stripe for example are bulked up and payments sent to the bank account every 7 days (less Stripe fees). We've found the best way to do this is to create a single gross invoice for the month (or a less frequent period if that helps) and then reconcile each payment that hits the bank account against this invoice. It takes some planning to get this right.
Are there more options I can use to elevate my SAAS business books?
Well we set out to give you a few tips but there is no harm in sharing a few more that we feel are real game changers - like using the budget manager to create a basic budget for your business, income by contact reporting to drill down and see customer wise revenue generated, use of bank rules for quick reconciliations etc are some you can use.
Can Evalua8 help with streamlining Xero for my SAAS business?
If you don't have the time or appetite to build this internally, we are only a call away. Reach out to us for a no obligation chat today.
Notes and references
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